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Race Discrimination and Mortgage Fraud

BY Stewart E. Sterk
October 31, 2007

The crisis in the subprime mortgage markets has brought to light many allegations of predatory practices by mortgage lenders and other participants in the housing industry. In Barkley v. Olympia Mortgage Co., NYLJ 8/28/07, p. 31, col. 3, Judge Raymond Dearie of the Eastern District approved a strategy that might permit some victims of the alleged fraud to obtain a federal forum, with the possibility of treble damages and attorneys fees: allege (and prove) that the predatory practices constituted a form of racial discrimination.

The Allegations

Plaintiffs in the Barkley case are all African-Americans who contacted United Homes about purchasing a first home. They allege that United Homes purchased defective homes at foreclosure sales, performed cosmetic repairs, and then resold the homes at highly inflated prices. The complaint alleges that United Homes worked with appraisers, who appraised the home at inflated prices, enabling lenders to obtain FHA insurance for loans that exceeded the value of the homes, and therefore to collect at inflated prices when borrowers defaulted. The complaint also alleges that United Homes offered the assistance of lawyers and lenders to speed through the purchase and mortgage process, giving the plaintiff-purchasers little opportunity to obtain independent advice. Perhaps concerned that they might be faced with a caveat emptor response to state law fraud claims, plaintiffs alleged that the various defendants ' United Homes, together with lenders, appraisers, and lawyers ' had targeted minorities as victims of the scam, and, in the process, had violated both federal civil rights statutes and the federal Fair Housing Act.

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